robo investing (ii): new entrants

Yesterday I observed that what much of what we’re now calling robo investing is already being used in traditional brokerage firms, only it’s to make sure individual brokers are adhering to investment policy set by the strategy and compliance staffs and not stuff that will result in lawsuits later on.

Discount brokerages differ from their traditional counterparts in that their fees are much lower, you can transact without involving your broker and they dispense only the most generic advice. Both, however, have several characteristics in common:

–to be used well, they require a considerable amount of financial knowledge and a commitment of time and effort to monitoring investments

–there’s a certain tension between the interests of brokerage houses, which make their money by clients trading and margin borrowing, and the clients themselves, who would probably be better off not doing much of either. In fact, I find it hard not to think that the paucity of performance attribution/analysis on broker websites is related to this

–neither kind of broker is particularly interested in clients with small amounts of money.

Hence the appeal of the new online robo investing firms. They are targeting people who have little money and no interest in trading but who want a long term-oriented savings vehicle that’s easy to understand and takes little time, but which offers potentially better returns than a bank account.

random thoughts

I think this is a great idea. Robo investing may well become the Millennial alternative to traditional brokerage houses. The argument that robo investing also threatens discount brokerage is more complicated. Still, I think the threat is there.

Looking at a number of new online firms, it’s striking how little practical investment experience the principals have. That’s not necessarily bad. More worrying to me is the number of academics on the boards. Hopefully, they have no operational role and are serving their usual function as spokesmodels.

I’m willing to bet the concept will be highly successful. There’s very little that’s proprietary in what the robo firms do, however. I think there’s the continuing risk that large financial institutions, like banks or discount brokers, will simply clone their own robo investing operations. So for the new firms it’s a race to expand before incumbents react.